Technology Innovation

Henry Hilska - Convexity Solutions

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

What does the DTCC announcement mean for the future of Blockchain and Bitcoin?

11 January 2017 | 5571 views | 1

The recent announcement from DTCC, a financial industry services leader processing trillions of dollars of securities transactions on a daily basis, concerning the unveiling of a credit derivatives post-trade lifecycle solution built using a distributed
ledger technology platform was not a surprise but certainly a milestone. If you’ve been following the development of what is more commonly called Blockchain, the news seemed to be inevitable. The success of their earlier proof of concept and the amount of
so-called hype surrounding this technology would make it seem apparent that this news was expected.

Though certainly not the only implementation of the technology in the news (see Axis Bank’s announcement on their own milestone, Postal Savings Bank of China etc.), the DTCC announcement may be among the most significant in size to date. So, can we all
now stop calling Blockchain hype? What is hype anyway? Many new ideas and technology that are touted so heavily that they often become labelled as “hype.” Per the Oxford Dictionary “hype” is defined as “to promote or publicize (a product or idea) intensively,
often exaggerating its importance or benefits.” Currently, there are several new technologies that get thrown into that most undesirable bucket by some pundits. Blockchain, or the technology underlying Bitcoin is among the current crop in that bucket that
have achieved hype status.

What makes something hype versus an actual technological advancement deserving merit? Often, we need to look no further than the source of the "hype" label and wonder if that individual or group just doesn’t see the possible benefits. New technologies
may be introduced long before there is a commercially viable use case. Thus, these technologies may linger on the periphery of the public conscience. So perhaps some of this commentary is self-inflicted. There is often a lack of patience and perhaps a bias
against those who promote “game changers” etc. as if they are just trying to be smarter than the rest of us mere mortals. The danger with these often-lazy assumptions, impatience and perhaps intellectual jealousy is that we can risk missing the forest through
the trees.

However, many so-called “game changers” do turn out to be just hype. But as technologists, consultants or just interested parties we need to be thoughtful in our assessments. Taking a plunge into an unproven technology can spell disaster financially and
to our careers.

While some may try to maintain the link between Bitcoin and Blockchain (i.e. Distributed Ledger Technology) as if the two are inseparable this is not how the marketplace is currently approaching this technology. The technology that underlies the virtual
currency is being utilized standalone by many financial services firms in various ongoing implementations and “proof of concepts” to determine its viability and scalability. The concept of utilizing DLT as the platform for a range of future applications to
automate the processing of assets, reduce overhead costs and improve efficiency is well-known. The challenges for the implementation of this technology are perhaps generally less well understood. What the Bitcoin use case provides us is almost as many questions
as it provides answers. What is still not understood are the challenges from an Operational Risk perspective of securing the Blockchain from both intrusion, as well as, collusion. The ability for organizations to define an entirely new set business processes,
governance structures and workflows and integrations that need to be created into vast ecosystems that may include partners, customers and vendors are yet to be unveiled. The planning that must also include consideration of various implementation strategies
(e.g. public versus private Blockchains) and the necessary contingency planning are all still somewhat undefined.

So, what makes the announcement of the development of the DTCC credit derivatives solution so important? What seems particularly interesting about it is that in an article published back in November 2016 Richard Gendal Brown, Chief Technology Officer of
R3, a financial innovation firm that leads a consortium partnership dedicated to DLT in financial services, was quoted as saying, “But it’s a journey. I don’t think any platforms that currently exist would claim to be fully ready for production yet,”. However,
one would surmise from the DTCC announcement is that they and their partners IBM and Axoni have resolved most if not all of these challenges, at least for this implementation. These challenges and others had to be resolved before any solution could succeed
in production where all parties would agree and consider what amounts to a new paradigm shift as business as usual.

Finally, on the flip side of the coin we should avoid reading too much from the DTCC announcement by making assumptions that all the challenges have been overcome at this point, including that sticky issue of securing the platform from intrusion and manipulation,
and that DLT is the panaceas for all the world’s problems, at least when it comes to digital assets and information. Further, by allowing Bitcoin and Blockchain to stand mutually exclusive provides us the ability to see each stand on their own merits. What
has become clear is that both present us a unique set of challenges. Perhaps this implementation will also open some eyes and provide Bitcoin the ability to overcome its own unique challenges so that the virtual currency can achieve additional milestones.
Thus, as the development of the credit derivatives post-trade lifecycle solution moves forward we all should have many questions and maintain a critical eye to use this milestone to further our work and understanding of this most interesting, emerging and
disruptive technology.

Henry's profile

I look to provide a pragmatic approach and leadership to financial services, project management and information technology. My areas of focus includes disruptive technology, business process design, r...